Impact of the PRC's Rate Case Decision

Who would have thought that by Nov. 13 we would have had a Postal Rate Commission decision but not a president-elect?

Be that as it may, in our little corner of the world, we do have a PRC decision to pour through. The commission and its staff waded through reams of testimony to reach their decision. Here are the points I found to be the most significant.

Let's start at the beginning - the U.S. Postal Service's revenue request.

The postal service said in its filing that it needed $2.8 billion in extra revenue to meet its break-even requirement. The most important decision the commission had to make was whether the postal service could prove it needed the full $2.8 billion. The USPS' testimony indicated that the revenue shortfall was made up of $800 million in additional operating costs, $250 million to pay down a portion of prior years' losses and $1.7 billion to cover unforeseen events and circumstances.

The commission and many interveners in the case took a hard look at the contingency to determine whether it was justifiable. Could the postal service prove to the commission and rationalize that fully 60 percent of its need for additional revenues was based on events and circumstances that it could not specifically determine?

After testimony from all sides, the commission reduced the contingency to $1 billion, still obviously a significant amount.

Several were given for the commission's reduction. First, the commission found that several specific expense forecast increases had been calculated in error. But the most significant reduction was based on the commission's assessment that, in the near term, there wasn't that much uncertainty about postal costs that required a $1.7 billion contingency. Still the commission did leave $1 billion as a contingency.

This $700 million reduction in contingency reduced the overall rate increase by about 25 percent. What follows is how the commission handled this $700 million gift to the various rate classes and categories.

However, it should be noted that the $700 million reduction would affect not only ratepayers but also the postal service. Richard Strasser, the USPS' chief financial officer, has provided a dim outlook for fiscal year 2001 finances, as the USPS is projecting a loss of $480 million. The reduction in the contingency allowance, however justified, will further increase the loss. Therefore, unless the USPS can find a magic productivity bullet or become immune to e-commerce mail migration, we'll likely see the next postal rate increase filing in front of the PRC sometime in 2001.

Now to some of the specific changes the commission made, beginning in the First-Class area.

Generally, the commission supported the postal service's automation program. That is, while it went along with the price increase for the First-Class stamp from 33 cents to 34 cents, in most cases it reduced the proposed USPS increase for automation-rated barcoded mail. The commission once again was particularly favorable to users of postcards. It kept the basic postcard rate at 20 cents and eliminated the proposed increase for several of the postcard automation barcode categories.

What was surprising about these changes was that the commission's rate recommendation was more favorable (lower increases) to First-Class carrier route presort mail than five-digit barcoded mail. This seems to run counter to the postal service's automation program, which aims to provide the letter carrier with mail that has been sorted according to carrier walk sequence. This is to eliminate office mail-casing time. Five-digit barcoded mail lends itself to this automated sequencing, while carrier route presort mail is not easily sorted and merged, with all other mail, to walk sequence.

In the past the commission has generally supported, via its rates, the postal service's automation program. Further study is necessary to understand this renewed support for the less automated First-Class carrier route mail.

For Standard-A mail, the commission's actions are more difficult to generalize. Some of this difficulty relates to the more complex Standard-A rate structure. Standard-A rates differentiate between letter shape and flat (catalog) shape; mail less than and more than 3.3 ounces; barcoded vs. non-barcoded; and where entered into the postal system.

However, general statements can be made. For letter mail weighing less than 3.3 ounces, the PRC tended to favor carrier route mail over five-digit automation presort mail, and three-digit automation presort over five-digit automation presort. These decisions are similar to those the PRC took in First-Class mail.

For catalog-shaped mail weighing more than 3.3 ounces, the PRC generally lowered rates slightly less than the USPS requested. However, the changes were rather oblique, in some cases raising piece rates but lowering pound rates. In other cases it lowered piece rates but raised pound rates. Some would undoubtedly like a more specific explanation of the PRC's action and its impact on your catalog. Unfortunately, that impact varies depending on the catalog's exact weight, its automation status, presort level and entry point into the USPS system.

Let's now take a look at the aspect of the rate filing that created a great stir - the proposed increase for periodicals.

The USPS proposed average increases of 14.2 percent, much higher than the systemwide average of 6 percent. The commission was able to reduce the average periodicals increase to 9.9 percent. The commission based the periodicals reduction on work done by a joint industry/USPS task force set up to seek ways to reduce flats' processing costs. This task force found several recommendations that were entered into evidence at the rate hearings and accepted by the commission. The commission then combined these savings with the reduced revenue requirement to come up with the politically more palatable increase of 9.9 percent. Funny how the increase worked out to just under 10 percent.

All in all, most mailers will be pleased by the commission's rate decision, in essence based on the reduction in the postal service's requested revenue increase.

Another issue should be mentioned. Commission chairman Ed Gleiman has announced that he will retire early next year. Commissioner Trey LeBlanc is nearing the end of his term. The three remaining commissioners, while honorable, intelligent and hard-working, have limited experience in regulatory affairs. If history is precedent, it's likely that the next two commission appointees also would have limited regulatory experience. Therefore, if there is a USPS filing in 2001 for higher postage rates, as I suggest, it would be heard before a relatively inexperienced commission - something everyone in industry, the USPS, the commission and the executive and legislative branches need to contemplate.

• Cary H. Baer is a direct marketing consultant and chairman of the Association for Postal Commerce (Postcom), New York.